The question
How do independent businesses work together when one sets the system and the others implement it where they are?
In brief
Franchising is vertical cooperation between legally independent businesses. The franchisor provides the concept, brand and know-how; the franchisee runs its business in its own name and for its own account according to the system’s standards. Germany has no franchise statute: the franchise agreement is a mixed contract whose limits follow mainly from general civil law, the law on standard business terms and competition law. The cooperation lives on uniformity and control, and that is where its legal risks lie.
The law
Vertical cooperation
Vertical means that the partners operate at different levels of the value chain, here the system headquarters and the local business. Comparing the ways a supplier can sell through independent partners shows what is specific to franchising.
A commercial agent (Handelsvertreter) is an independent trader permanently entrusted with negotiating or concluding transactions for another business in that business’s name (Section 84(1) German Commercial Code (HGB)). The agent acts in another’s name, earns commission and, on termination, may claim an indemnity for the customer base built up (Section 89b HGB).
An authorised dealer (Vertragshändler) buys and sells in its own name and for its own account but is integrated into the manufacturer’s sales organisation. There is no statutory regime. According to settled case law, Section 89b HGB may apply by analogy if the dealer is integrated like an agent and obliged to hand over its customer base to the manufacturer on termination.
A franchisee likewise acts in its own name and for its own account. Unlike the dealer, however, it takes over an entire business concept: brand, appearance, processes, manual, training. The Federal Court of Justice (BGH) refused an indemnity by analogy with Section 89b HGB for a franchisee whose customer base was essentially anonymous and merely stayed with the system in fact after termination (BGH, judgment of 5 February 2015 – VII ZR 109/13).
Unlike a branch, each franchise outlet remains a business bearing its own risk.
The franchise agreement
The franchise agreement combines elements of several contract types: licences for trade marks, copyright and know-how, sales obligations, services such as training and advice, and often purchasing obligations. As a continuing obligation it can be terminated for a compelling reason (Section 314 German Civil Code (BGB)). Typical terms cover the territory, entry and ongoing fees, the manual and its standards, control and reporting rights, advertising, purchasing ties, non-compete obligations, term and termination.
Franchise agreements are almost always drafted by the franchisor and are therefore subject to review as standard business terms under Sections 305 et seq. BGB; terms that unreasonably disadvantage the franchisee are invalid (Section 307 BGB). Where the agreement contains purchasing obligations and the franchisee is an individual starting a business, a right of withdrawal under the rules on instalment supply contracts may come into question (Sections 510, 513 BGB) [prüfen].
Pre-contractual disclosure
The franchisor knows more about its system than any applicant. There is no statutory disclosure regime in Germany. Duties to inform nonetheless follow from the pre-contractual relationship (Sections 311(2), 241(2) BGB). Information about the system, particularly on turnover and profitability, must be accurate and complete. How far there is a duty to disclose risks unprompted is assessed by the courts case by case [prüfen]. Breach gives rise to damages (Section 280(1) BGB), which may extend to unwinding the contract. The codes of conduct of franchise associations go further but are not binding.
Competition law
Agreements between undertakings that restrict competition are prohibited (Art. 101(1) TFEU, Section 1 Act against Restraints of Competition (GWB)). Vertical agreements are governed by the Vertical Block Exemption Regulation (Regulation (EU) 2022/720), in force since 1 June 2022 and expiring on 31 May 2034. Through Section 2(2) GWB it also applies to the German prohibition.
Vertical agreements are exempted where supplier and buyer each hold no more than 30 % of their relevant markets (Art. 3(1)). Hardcore restrictions are not exempted (Art. 4), above all fixed or minimum resale prices. Maximum prices and recommended prices remain permissible as long as pressure or incentives do not turn them into fixed prices in effect. Non-compete obligations during the contract are exempted only up to five years (Art. 5(1)(a)). Post-term non-compete obligations are exempted only exceptionally, for no more than one year, where indispensable to protect know-how (Art. 5(3)).
For franchising, the Court of Justice recognised early on that obligations protecting the system’s know-how and identity do not fall under the prohibition at all (CJEU, judgment of 28 January 1986 – 161/84, Pronuptia). See Competition and cooperation.
Bogus self-employment
The more closely the system steers the franchisee, the more pressing the question whether the franchisee is still an entrepreneur. If the franchisor dictates working hours, working methods and processes to the point that no business decisions of its own remain, there may be an employment relationship (Section 611a BGB) or employment subject to social insurance (Section 7(1) Social Code Book IV (SGB IV)). The consequences fall mainly on the franchisor: back payment of social security contributions, employee rights, jurisdiction of the labour courts. A status determination procedure can clarify the position (Section 7a SGB IV). As a rule of thumb, standards for results and appearance are typical of a system; steering the work itself is not.
Online
Online sales within the system. A franchisee may in principle sell online. Preventing the effective use of the internet for sales is a hardcore restriction (Art. 4(e) Regulation (EU) 2022/720). Quality requirements for the online presence that protect the system’s image remain permissible, and restrictions on selling via certain platforms can also be exempted [prüfen].
Territorial protection. Online, territories blur. The Regulation distinguishes active sales, such as targeted online advertising in another territory, from passive sales in response to unsolicited requests (Art. 1(1)(l) and (m)). In principle, only active sales into territories the supplier has reserved to itself or allocated exclusively to others may be restricted (Art. 4(b)). The agreement should settle to whom orders from a territory are allocated, especially where the franchisor runs its own online shop.
Data. Who receives and may use customer data from online sales is one of the most important questions in any system, including for the value of the business after termination. Under data protection law, joint controllership may arise (Art. 26 GDPR), see Data and rights.
Training online. Where franchisees are trained via a learning platform with on-demand content and progress checks, it should be examined whether the Distance Learning Protection Act applies, which also protects businesses [prüfen]. See Service contract.
Relevant phases
- Finding partners: franchisor and applicants assess each other.
- Establishing contact: pre-contractual disclosure begins.
- Agreeing the cooperation: the agreement is concluded and checked against standard-terms and competition law.
- Carrying out the cooperation: standards and control must respect independence.
- Ending the cooperation: non-compete clauses, customer data and indemnity questions.
Limits of this overview
This page gives an overview of German and EU law on franchising. Sector-specific rules, tax law and foreign franchise statutes are not covered.
As at 30 September 2026